AIG Posts $7.8 Billion Loss,Seeks Capital As Damage Mounts

May 08,2008 00:00 by dow-jones

American International Group (AIG) joined the ranks of the credit crisis's biggest losers Thursday, reporting a $7.81 billion first-quarter loss and announcing plans to raise $12.5 billion in fresh capital as losses on complex securities soared.

AIG said profits were hurt by a $9.11 billion hit on its portfolio of insurance on securities that have plunged in value and $6.82 billion in losses on investments. AIG reported another $6.82 billion in impairments that for accounting reasons only showed up on its balance sheet.

The blows brought AIG's total write-downs and losses from the credit crisis to more than $30 billion, with another $9 billion-plus in damage just to the balance sheet, putting the insurer in the same league as UBS AG (UBS), Citigroup Inc. (C) and Merrill Lynch & Co. (MER).

The massive losses spooked investors and could deal a setback to optimists who have bet the worst of the crisis has passed.

"No one expected a clean quarter, but this is a lot messier than I had expected," CreditSights analyst Rob Haines said.

The cost of protecting AIG's bonds against default jumped 11% after the announcement, and the insurer's shares fell 7.5% to $40.84 in after-hours trading. Standard & Poor's cut its credit rating on AIG one notch to AA- and put it on watch for a further downgrade.

"Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations," S&P analyst Rodney Clark said in a release.

Fitch Ratings followed suit, warning of AIG's $61 billion in exposure to complex securities backed by residential mortgages.

The insurance company reported a net loss of $7.81 billion, or $3.09 a share, against a year-earlier profit of $4.13 billion and following a fourth-quarter loss of $5.3 billion. Analysts polled by Thomson Reuters were expecting a much smaller loss of 76 cents a share.

To repair the hole opened by the losses, AIG on Thursday launched a $7.5 billion offering of common stock and other equity securities. Another offering of hybrid securities will follow later. AIG had a market capitalization of about $110 billion at the close of trading Thursday.

Even as it sought more capital to bolster its balance sheet, AIG raised its quarterly dividend 10%, to 22 cents a share.

Many of AIG's problems stem from so-called collateralized debt obligations - the same securities that got Citigroup, UBS and Merrill into deep trouble - but in reverse. While the banks generally got hurt by holding CDOs that plunged in value, AIG has been hurt because it sold insurance against defaults on those instruments.

All have been hurt by exposure to "super senior" tranches that sound like first-rate credits but which have been hard hit as confidence in complicated securities linked to mortgages plunged.

In December, AIG told investors that write-downs on its credit derivatives portfolio for October and November would be around $1.1 billion. It later raised the number to almost $5 billion, then ultimately reported a hit of more than $11 billion. To date, the value of the portfolio has fallen by more than $20 billion.

"While we anticipated a difficult trading environment, the severity of the unrealized valuation losses and decline in value of our investments were beyond our expectations," CEO Martin Sullivan said Thursday in a release.

The head of the financial products unit that housed the losses, Joe Cassano, resigned earlier this year. The unit swung to an operating loss of $8.77 billion in the first quarter from a profit of $292 million a year earlier. Haines, of CreditSights, says CEO Sullivan will come under increasing pressure himself if he can't turn around the situation in a couple of quarters. An AIG spokesman declined to comment.

AIG has multiple exposures to the housing crisis, and results were weak across the board. The company's asset management unit posted an operating loss of $1.25 billion versus profits of $758 million a year ago amid losses on hedges, lower investment returns and depreciation expenses related to real estate investments acquired late last year.

The life insurance unit swung to an operating loss of $1.83 billion from a profit of $2.28 billion on hedging losses and damage to investment income from "volatile capital markets." Operating income in AIG's big general insurance operations fell 57% to $1.34 billion.

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